At the beginning of 1975, the S&P 500 index was at 68.56. Since then, the S&P 500 Index has seen an impressive growth rate at its current level around 1,500. During that time, the S&P 500 Index has had 25 years of positive gains and 7 years of negative returns. The three best years (1975, 1995 and 1997) were all above 30% return, with the best year being 1995 with a return of 34.11%. Only four years (1977, 2000, 2001 and 2002) resulted in a double-digit loss, with the worst year being 2002, which resulted in a drop of 23.37%.
To me, the historical returns of the S&P 500 Index demonstrate two valuable lessons: the importance of diversification and the value of time when investing in the stock market. While I’m sure there are people out there who can correctly determine the best time to buy and sell stocks sometimes, I’ve yet to meet someone who can “time the market” consistently. However, if you can think in terms of “time to market” instead of timing the market, time becomes an ally rather than a hindrance. The longer your money is in the market, the more likely it is to achieve historical stock market returns.
Of course, diversification is also a very important factor. Individual stocks are subject to many more “ups and downs” than a well-balanced portfolio. This is why most people who try to beat the market through short-term trading fail. It is very difficult to be adequately diversified when your portfolio changes every day due to new trades being made. As a result, at some point, a risk factor that has not been properly diversified will have a significant impact on a trader’s portfolio in the short term. In general, some of the most successful investors, like Warren Buffet, have been buy-and-hold investors who have allocated their money to quality stocks and then let the market do the rest. Think of the stock market as a slow moving river, from time to time you can swim against the current, but it is much easier to swim with the current by letting the market help you move forward.
